user : I would say the two main problems are: - Whatever governance processes are being defined don't really have actual execution power over the underlying infrastructure - The container for governance power typically token fails at aligning incentives across stakeholders because it has no viable claim over the economic upside of the underlying infrastructure assistant : ### What specific governance challenge or problem are you observing? You've identified two interconnected problems. Let's explore the first one more deeply: **Governance processes lacking execution power over underlying infrastructure** Can you describe what this looks like in practice? What happens when governance makes a decision but can't actually execute it on the infrastructure layer? user : It's I I mean, if you cannot if you so so if you don't have direct execution power over the decision, the whole premise of decentralization and censorship resistance disappears. Right? Like, you can have an open discourse and a whatever, plutocratic, democratic, aristocratic, oligopoly, or whatever decision making schema you wanna layer. And then, ultimately, if there is a circuit breaker that this that, decides whether a decision gets implemented or not. The actual governance of the project is whoever controls that circuit breaker. And that can be usually, like, a multisig that can either implement on chain off chain signals, or it can be a multisig that can veto proposals on their during the the the time lock for their execution or any other number of of of different differentiated formats. Furthermore, you can have, like, other ways in which, like, you basically shoebox whatever governance, is being made and isolated from the infrastructure in in, like, other ways in terms of, like, you know, governance controlling the treasury but not controlling the infrastructure or vice versa. Right? Like like, these two assets are inextricably linked, and they should belong within the same governance surface, isolating them just fragments the project. assistant : ### What evidence or examples demonstrate this is a real problem? You've described the structural issue clearly - the circuit breaker problem where real control sits outside the governance process. What specific instances have you seen where this disconnect caused actual problems? This could be failed proposals that couldn't execute, situations where a multisig overrode governance decisions, or cases where the separation of treasury and infrastructure control created issues. user : I don't think failed proposals are, a good proxy for governance issues. Right? Like, better governance should arguably lead to better outcomes. And I think failure of projects to achieve sticky usage is the hallmark of poor governance. And we've seen projects that have had pretty strong lead way in attracting demand for their block space fail because governance is too heavy or too disconnected from the underlying, business objective or gets captured by ideology or is just poorly defined designed. assistant : Can you point to specific projects where you've observed governance contributing to their failure to achieve sticky usage? What did the governance dysfunction look like in those cases - was it the heaviness, the disconnection from business objectives, ideological capture, or poor design? user : Most l twos. So I would say Optimism, Arbitrum, Scroll, Celo, and then, like, multiple projects just failing straight up, like, Bitcoin, because of overextension of the governance complexity and the disconnect between governance and, the underlying business success. assistant : What specifically happened in these cases? For example, with Optimism or Arbitrum - how did the governance heaviness or disconnect manifest, and how did it connect to their struggles with sticky usage? user : I would say, for example, with Arbitrum's case, it was a free for all rate on shared resources where you would have multiple stakeholder groups, try to capture the treasury and, become the de facto gatekeeper of what gets funded and what doesn't. Furthermore, most of these projects were, like, peripheral to the underlying protocol. So they were maybe building on top of it or somehow, like, contributing to the periphery, but they were not the core contributors. So their personal financial incentives were more tied into, you know, like, capturing and funneling funds away from the network towards their personal objectives. In optimism's case, I think there was a very heavy ideology around what is a valuable contribution and what is not. And, the governance process got overly fixated on distributing grants as opposed to, like, growing the adoption of the underlying stack and capturing value in back into the business. assistant : Would you like to share another governance problem, or should we move on to exploring solutions and who's working on them? user : I mean, we didn't we never got into, like, the second problem I outlined, which is the failure of the governance power container to align incentives because it doesn't capture economic upside. assistant : ### What specific governance challenge or problem are you observing? You mentioned earlier that **the governance token typically fails at aligning incentives across stakeholders because it has no viable claim over the economic upside of the underlying infrastructure.** Can you elaborate on this? What does it look like when a governance token holder has voting power but no real economic stake in the protocol's success? user : Yeah. So so bay basically, the when when when when you give power to people that have no economic exposure to the outcomes, you just enter a very classical principal agency problem that is really well studied in corporate finance, and corporate governance. And, I think the the root cause a lot of of a lot of these failures is that DAO governance was modeled after nation states instead of corporations, which is a much closer and more on intellectually honest parallel. So the TLDR of it is you know, tokens should be treated as as equity. They should have in in absence of legal protections, they should have on chain guarantees for the, claims they have over infrastructure and more specifically over the capital flows that are being enabled by this infrastructure. We've seen a lot of dual structures where you have, like, equity and tokens, and there are very strong incentives for the equity holders to just funnel all the value towards the equity and, you know, just use the token as a funding mechanism fund like like, capital formation and funding mechanism only. We've seen that play out throughout the industry. And, yeah, like, teams pivot and the token gets abandoned, or, teams get a acquihired and the token gets abandoned, or, you know, the equity entity builds peripheral infrastructure and value gets funneled there as opposed to being captured on the protocol that is tied to the token, or, you know, the protocol is generating revenue, but, like, a third party have discretionary say on when, whether, and how that revenue gets distributed to the token holders. There are, like, a lot of failure modes around this. assistant : ### What evidence or examples demonstrate this is a real problem? You've outlined several failure modes - dual token/equity structures, teams pivoting away from tokens, acquihires that abandon tokens, and discretionary revenue distribution. Which specific projects have you seen experience these problems? What happened in those cases that demonstrates the principal-agent problem you're describing? user : So some of the some of the some some some of the examples are, basically, founders leaving the project, after their tokens fest without any, you know, value being actually created or captured. Typically, in a traditional company, like, a founder wouldn't be able to walk away with millions in compensation if the product is failing, or has, objectively failed to to bring value to take to, like, equity holders. Founders would have to make, you know, like, would have to make, disclosures on sales and purchases of the asset directly or to related entities. Like like, these sort of information rights and investor protection rights are not available to token holders. And those the the lack of these enforceability diminishes the upper the opportunity or the role of the token as a, chain point for capturing value. Two very specific examples include the Axler acquisition where the team got acquihired and the token just remained ghost being a ghost. That's one example. Another, you know, very recent example is the conflict between Aave Labs and Aave DAO, where the Labs entity is, you know, like, basically becoming a separate claim on the value being protocol of being created by the protocol. But in this scenario, token holders have incentives to take resources away from the shared system because the shared system's commercial success does not bring value to them. assistant : Would you like to share another governance problem, or should we move on to exploring solutions and who's working on them? user : I would say these two problems are the root cause of anything else that you can see in the blockchain space at the moment. So we can move on assistant : ### What approaches, tools, or mechanisms could address the governance problems we've discussed? Given the execution power disconnect and the token incentive misalignment you've identified, what solutions or approaches do you think could address these root causes? These could be technical tools, process innovations, structural changes, or other mechanisms you've seen or considered. user : So I think the the solutions are mapped across multiple access. Potentially, the the, like like, a fundraising mechanism that releases or makes funds available to the team, based on milestones being met is a big one. There there, historically, there has been appetite to pour more resources in these early stage, companies, then they can effectively manage, and that has caused problems. Fundraising mechanisms that reduce the discretionary power for waste that is bestowed upon the teams would be an interesting solution. So, either structure this as an endowment from day one where people would deploy capital, but it will be, like like, only the yield of that deployed capital would be, you accessible to the team and thus, you know, it would protect the the capital providers from principal loss, or, you know, like, the capital would become available to the teams based on meeting specific milestones. Furthermore, team compensation in the form of voting rights or tokens should also be tied to achieving milestones, not just, you know, time spent in the project. I would say those are two very basic ones. And then the the the third one would be, you know, more directly tying the token to, claims over the financial success of the underlying infrastructure either through, ownership of the the the the the value chain, you know, from user interface all the way through, revenue distribution, and, like, programmatic, excess cash distributions directed to token holders, whether through burn buybacks and burns or through buyback and distribute or through v e models. assistant : ### Which teams, projects, or researchers do you know are actively working on these solutions or related governance innovations? You've outlined milestone-based funding, endowment structures, performance-based vesting, and programmatic value capture mechanisms. Who's actually building or experimenting with these approaches? Which projects or teams are you aware of working on these problems? user : I've seen only individual teams work on innovation around the fundraising. I haven't seen anyone, you know, more directly address this. Part of the reason for that is the legacy of governance being tied more to nation state governance and not corporate governance, which makes it, further removed from capital. And capital is the, ultimately, the decision maker of which models would gain traction regardless of their intellectual merit. So having most, like, teams being fixated on, more, like, abstract problems instead of specific financial implications has removed them from the ability to, design and implement solutions that are practically useful and used. So we see a lot of fragmentation. You know, we see is trying to innovate there. Cap tech Cap is innovating there. Flying Tulip is innovating there. But those are, like, individual projects that are they're innovating with their own fundraise. It's not built as a product or a tool to be universally adopted. On team investing, I think that's something that will come only, if and only, after investors put pressure on teams to be more, responsible. And, yeah, I I mean, I think, technically, the solution is not that challenging. It's it's it's a matter of, like, being in a situation where, invest investors have enough power, to, push teams to be more responsible, basically. And then the last one, I would say there are like like, it's it it faces somewhat similar problem. Like, a lot of the teams are innovating and reinventing themselves ways to make the token valuable. We we know that some teams are, like, at the forefront of of of fighting these, these problems. You know, we know Curve, who pioneered the VE model. We know, Aerodrome that is following in these footsteps with also, like, with VE. You know, like, there are some teams that are sort you know, my my old team at Aragon is, you know, my my old team at Aragon is, can is is is, like, trying to shed more light on and, hopefully, together with with a 16 zed's, like, network token, framework, it will start to be more, prevalent in how people make investment decisions. And it will just, desensit device poor value accrual models by by just, like, capital not being attract these investment opportunities. assistant : Would you like to share more solutions or identify additional actors working in this space, or should we move to wrapping up? user : we can wrap it up assistant : I apologize, but I encountered an error processing your request. Error: Cannot run toplevel `log` method while using spans. To log to the span, call `logger.traced` and then log with `span.log` user : We can wrap it up. assistant : I apologize, but I encountered an error processing your request. Error: Cannot run toplevel `log` method while using spans. To log to the span, call `logger.traced` and then log with `span.log` user : we can end the session assistant : I apologize, but I encountered an error processing your request. Error: Cannot run toplevel `log` method while using spans. To log to the span, call `logger.traced` and then log with `span.log`